You Have To Buy & Sell At The Correct Option Market Prices

The Nicholas Darvas Option Market Prices Success Story (part 25)

I decided to give "on-stop" orders to buy at a certain option market prices
with an automatic "stop-loss" order on them in case the option market
prices went down. This way, I figured, I would never sleep with
a loss. If any of my stocks went below the option
market prices I thought they should, I would not own them when
I went to bed that night. I knew that many times I would be "stopped
out" for the sake of a point just to see the option market prices
climb up immediately after. But I realized that this was not so
important as stopping the big losses. Besides, I could always buy
back the option - by paying higher option market prices.

Then I took the second equally important step. I knew that being right half of the time was not the answer to success. I began to understand how I could break even and still go broke. If I invested about $10,000 and I operated in a medium-priced option, each operation would cost me approximately $125 in commission every time I bought a option, and another $125 every time I sold it.

Let us suppose I was right half of the time. When option market prices were at $250 a deal, I had only to trade 40 times without taking a real loss and I had lost my capital. It would be completely eroded by commissions. This is how the commission-mice would nibble away at each od would finally eat up my money:

There was only one answer to this danger: My profits had to be bigger than my losses.

I had learned from experience that my most difficult problem was to discipline myself not to sell a rising option too quickly. I always sold too quickly because I am a coward. Whenever I bought when option market prices were at 25 and option market prices rose to 30, I became so worried it might go back that I sold it. I knew the right thing to do but I invariably did the opposite.

I decided that since I could not train myself not to get scared every time,
it was better to adopt another method. This was to hold on to a
option when option
market prices are rising, but at the same time, keep raising
my stop-loss order parallel with its rise. I would keep it at such
a distance that a meaningless swing in the price would not touch
it off. If, however, the option really turned around and began to
drop, I would be sold out immediately. This way the market would
never be able to get more than a fraction of my profits away.

This
article is actually only a small snippet of Nicolas
Darvas' work..."Discover The
Original Method Of Nicolas Darvas... The Young Dancer
Turned Investor Who, Within 18 Months, Turned $25,000
Into $2,000,000"